Pennsylvania housing slowdown to continue in 2008

December 19, 2007

PHILADELPHIA — There was no shortage of pain in the 2007 housing market.

While Pennsylvania weathered the slump better than the nation, where it has become a full-fledged crisis, the Commonwealth still got hit by declining home sales, high foreclosure rates, subprime mortgage busts and tougher access to credit. Builders reported flagging sales, mortgage insurers posted losses and mortgage lenders closed branches.

More hurt is on the way in 2008 — especially as the economy cools.

“It’s going to be another tough year,” said Kevin Gillen, vice president at Econsult, an economics consulting firm in Philadelphia. “We haven’t hit bottom yet.”

After years of heady gains, the housing market began to cool in fall 2006 and the slowdown accelerated this year. Houses for sale sat longer on the market and impatient sellers cut prices to snag buyers. Home builders piled on incentives to move their stock.

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As interest rates rose on adjustable-rate mortgages, borrowers who were on thin financial ice were pushed into foreclosures. Particularly hard-hit were holders of subprime mortgages, loans extended to those with poor credit. After loan defaults, lenders had to write off these mortgages and set aside bigger reserves for future losses.

Lending standards were tightened, making it tougher to get loans. Home buyers who would have qualified for a mortgage a year ago suddenly were shut out, leading to lost home sales and further worsening the housing slump.

“Financing sources are likely to be more scarce now and in the future, especially for subprime borrowers in the months ahead, and foreclosures will continue to rise,” said Austin Jaffe, director of the Institute for Real Estate Studies at Penn State University and a consulting economist to the Pennsylvania Association of Realtors.

In October, the number of foreclosures in the state rose by 17.5 percent to 3,170 from a year ago, according to the most recent statistics from Realty Trac Inc. in Irvine, Calif.

For the first 10 months of the year, the state posted 29,273 foreclosures, which is more than all the cases reported in 2005. Pennsylvania had 38,333 foreclosures in 2006.

This year, nearly 1,100 branches of first- and second mortgage lenders were closed, or 28 percent of the total, according to the state Department of Banking.

Business was bad for builders such as Toll Brothers Inc. in Horsham. The nation’s largest luxury home builder posted a fourth quarter loss — its first quarterly loss in 21 years — after taking a $314.9 million writedown mainly for homes it could no longer sell at a profit. The builder called the current housing slump the worst it has seen in four decades.

Mortgage insurer Radian Group Inc. in Philadelphia took a $304 million after-tax hit in the third quarter from a joint venture that invested in subprime mortgages. Its total quarterly loss came to $704 million, or $8.78 per share. The company rushed to reassure shareholders that it is not in a liquidity crisis.

While not pretty, the housing slump in Pennsylvania could have been worse if the market had overheated to levels seen elsewhere.

Sales of existing single-family homes, condominiums and co-ops in the state fell by a seasonally adjusted rate of 3.2 percent in the third quarter, according to the National Association of Realtors in Washington. That is better than the 13.7 percent decline in the U.S. and the 7.3 percent drop for the Northeastern states.

Pennsylvania also outperformed the sunny states: Nevada’s home sales fell by 35 percent, Florida’s plunged by 32 percent and California’s were down 28 percent.

“We’re not going to suffer the extremes of the coasts, where prices rose and are declining the most,” said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School, who wrote a 2005 report that questioned whether risky mortgage lending practices would prick the housing bubble.

In the third quarter, median home prices in the state fell or gains became smaller than the double-digit increases in years past. But the state still outperformed the country.

In the Allentown-Bethlehem-Easton area, the median sales price of an existing single family home was $272,900, up 1.1 percent from a year ago, according to the National Association of Realtors. Figures are not seasonally adjusted.

In the Philadelphia area — which includes Camden, N.J., and Wilmington, Del. — prices rose by 2.9 percent to $243,000. Pittsburgh, which had been an underperformer, was up 6.1 percent to $127,700. Home prices in Reading went up by 7 percent to $162,900. In Erie, prices were flat at $103,800.

Nationally, home prices fell by 2 percent.

As for condominiums, units in the Philadelphia area saw a 1.1 percent increase in median prices to $195,900 in the third quarter.

“The Philadelphia area is a little bit more volatile than the rest of the state, but even with that, the downturn will not be as hard in Philadelphia as other parts of the country,” said Celia Chen, director of housing economics at Moody’s Economy.com in West Chester.

She estimates that 2007 will see home prices rise by 3 percent in Pennsylvania and down by 3 percent nationally. For next year, Chen is forecasting a 1 percent drop in home prices for Pennsylvania, but a 7 to 8 percent decline for the U.S. as a whole.